I'm on L1 Visa and my wife is on L2 visa. Our current visas/I-94 has expired. However we had already filed for an extension and it is pending with USCIS. I'm planning to apply for an ITIN for my wife. Will they reject her application because of the expiry date? Will they take into account the pending extension? Along with W7 form and a notorized copy of her passport should I attach a covering letter saying that a visa extension request has been filed and is pending with USCIS? Any guidance in this direction will be of great help.

ITIN will be fine even with expired I-94. No need to explain.

Normally if your spouse can not get SSN, you file W-7 with your tax return.
Why do you need ITIN?